Prepare your company to be bought

Prepare your company to be bought

[Editor’s Note: Many business owners fail to prepare their businesses for a sale either because they believe that a potential sale is far off in the future or because they are focused on current issues and do not consider preparation to be a priority. We would submit that companies need to be “prepared to be bought.” Sometimes lucrative offers come unexpectedly for companies that are well-positioned. We typically recommend that a company engage an experienced investment banker to assist them in a sale – often even if they have received an offer – in order to generate a competitive environment.

Some business owners who have tried to “time the market” at some point off in the future have found that unpredictable events such as the 2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11, industry issues, etc. can derail their ability to sell at maximum value. We recommend to our clients to work each year to make certain that their companies are currently desirable to buyers. – DPM]

How best to position a company to be attractive to buyers:

1.    Demonstrate Strong Financial Performance

a. Historical Financials
•    Consistent revenue growth (at least upward trend)
•    Recurring revenue is a plus
•    Strong operating margins
•    Increasing profitability
•    Importance of last twelve months

b. Operating Cash Flow
• Focus on hitting projected revenue and earnings numbers
• Review net profitability of customers and products

2.    Maintain “clean” financials

a. Audited or “auditable” Financial Statements
•    Have your financial statements audited with a reputable firm to add credibility
•    Use GAAP accounting. If not, identify how practices differ from GAAP
•    Understand cash vs. accrual accounting – timing differences can be material

b. Income Statement Adjustments and “Add-backs”
•    Buyers are skeptical of earnings that rely on substantial add-backs (one-time, non-recurring charges, private company expenses, etc.)

3.    Diversify your customer & supplier base
•    Diversification signifies a healthy business and reduces risk
•    Buyers will pay less for companies dominated by one or two customers
•    Examine what % of sales your top 10 customers represent?
•    How stable are your top suppliers? How stable are their terms?
•    Do you have multiple suppliers for critical components/services?
•    What % of total purchases does your top supplier represent? Top-5 combined?
•    What % of the company’s sales are related to a few key employees?

4.    Develop a Strategic Growth Plan
•    Maintain a clear strategy and be able to demonstrate your history of execution
•    Be able to articulate specific future growth opportunities
•    Position your company to take advantage of them

5.    Build a capable Management Team
•    Invest in training and key strategic hires, if needed
•    Motivate management to add value to the company through a potential sale
•    Focus on building a deep management team that can thrive without your continued leadership

6.    Eliminate potential “Gotchas”(these are items that could result in significant discounts to value)
•    Maintain legal documentation (licenses, regulatory filings, contracts, intellectual property, incorporation, etc.)
•    Clear title to all assets
•    Document processes and procedures
•    Resolve legal disputes


7.    Build a team of Qualified Advisors
•    Minimize distractions from running your business effectively
•    Get advice from professionals who have expertise in areas you do not and have done it before
•    Beware of advisors that outstep their areas of expertise

Are you and your company ready if a buyer appeared on the radar?
Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.

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The Mead Consulting Group has helped over 50 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a  transaction team.

What successful business owners say about us:

 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company

A successful process is draining and stressful.  The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction.  Why reinvent the wheel?  We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ...  CEO, Behavioral Healthcare

...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company

...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business

Why 2014-15 could be a great time to sell a lower middle market company

Why 2014-15 could be a great time to sell a 

lower middle market company

What is a lower middle market company?

Lower middle market is defined nationally as transactions between $10M and $250M in enterprise value.

  

When is a good time to sell?

CEOs and business owners routinely ask the question, When is the best time for me to sell? Is now a good time or should I wait? Truthfully, many of the folks that address that question (investment bankers, private equity professionals, financing sources) have a vested interest in having companies go to market. So business owners can be skeptical when reading optimistic projections. 

We have advised business owners for years that there are a number of factors to consider when evaluating if it is a good time to sell a business. The most important is to make sure your company is prepared, and to not wait for the "absolute best time" to sell, but to sell when the market is good. There are lots of examples of companies that have regretted not going to market in 2006-2007 because they thought the market for their company would be better in 2009 or 2010.

There are a number of factors that suggest that 2014-2015 is a terrific time for lower middle market company owners to sell.

  

1. Company results have rebounded or stabilized. Most lower middle market companies have rebounded or at least stabilized from the downturn. Even if revenue growth in some sectors is still very moderate, most companies have done an excellent job of managing expenses and increasing cash flow.

2.   Valuations are high. With stock market at record levels, the prices (multiples of EBIDA) being paid for good companies are at high levels.

3.  Interest rates are still low.This is important since the buyer of your business need to borrow for the transaction.

4.  Private equity firms have plenty of dry powder and fewer distractions from older investments. Many private equity firms spent the year in 2013 selling their portfolio companies. They now have lots of capital to invest and need to put that capital to work by buying companies. They also can focus most of their attention on looking for new opportunities.

5. Private Equity has an increased focus on lower middle market transactions. According to a recent survey  of 1000 dealmakers conducted by KPMG and Merger & Acquisitions magazine, a whopping 77% of respondents expect most of the M&A activity to fall in the lower middle market space

6. Strategic buyers still have lots of cash. Strategic buyers have been accumulating cash in record amounts as they have emerged from the downturn lean and more productive.

7.  Strategic buyers need to find new ways to grow. Sources of organic (internal) revenue growth have been difficult for most strategics. They are under pressure to acquire companies that add new products, new customers, new geographies, and new capabilities.

8. There are still more buyers than sellers in the market. The number of baby boomer business owners who are reaching retirement age is increasing daily. There will come a time when these business owners need to sell and there may well be a glut of businesses on the market. This has not happened yet. By 2016, there may be as many as 1.5 million business owners who need to sell to provide liquidity for retirement - even adjusted for new retirement expectations that changed during the recent downturn.

Are you and your company ready to go to market?

Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.

If you would like to perform a free Self Assessment of your company's readiness to maximize value in a sales or recapitalization transaction, 

 click here (go to the bottom of the page and download the self assessment).

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The Mead Consulting Group has helped over 50 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a  transaction team.

What successful business owners say about us:

 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company

A successful process is draining and stressful.  The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction.  Why reinvent the wheel?  We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ...  CEO, Behavioral Healthcare

...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company

...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business

"Crossing the Chasm" Still Valid After 20 Years

Twenty years ago, I read a new book by Geoffrey Moore, Crossing the Chasm. I had the opportunity to become acquainted with the author and became a student of his methods and strategies for moving products and services from innovation to mainstream. I have several dog-eared copies of the book and have distributed scores more to clients over the years.

Crossing the Chasm popularized the “technology adoption life cycle,” which models how different groups of customers embrace a product or service over time. All established markets and popular products began as obscure inventions at the point of introduction. Not every innovation becomes popular, so navigating the life cycle is one of the biggest challenges for innovators, investors and marketers. Creating and navigating the technology adoption life cycle , that is, creating new markets, is the dream of every entrepreneur with a disruptive new idea.

While many assume crossing the “chasm,” or moving from the early adopters to the early majority ,is unique to technology product adoption and it was especially present years ago when technology meant big investment and big risk for big businesses, many of the principles and tools also apply to adoption of innovative and disruptive products, services, and business models. Since mainstream users won’t take their buying cues from the early users or geeks, a gap exists between the early market and the mainstream market. Crossing the Chasm is the story of navigating the curve and leaping the “chasm” – the difference between success and failure.

What’s new in the 3rd Edition?

Recently Geoff Moore outlined in his blog “What’s New” and “What’s Not New”. I have taken the liberty to outline it below:

What’s new?

1.        Consumer IT. To paraphrase Cheech and Chong, “We don’t need no stinkin’ chasms!” Chasms are a function of required commitments perceived risks. For a consumer on the Web, there are no commitments required, and there are no risks. So a Google, a Facebook, a Twitter, an Instagram—all can (and did) go viral in record speed. In this world, it is “Tornado, or bust!”

2.        The Four Gears. New dynamics require new models—that’s why I had to add an appendix to the third edition covering this one. For consumer IT, there are four gears that need to spin up in harmony faster and faster to generate tornado winds. They are: Acquire, Engage, Convert, and Enlist. People naturally focus on Acquire and Convert because they are the two that are easiest to measure, but real power comes from the ability of a Web property to Engage users and Enlist evangelists.

3.        Cloud Computing. I am thinking specifically of enterprise IT here, and there is no question in this context that cloud itself has had to cross the chasm. But now that it has, and brought along with it SaaS applications and more recently mobile clients, the barrier to entry for next-generation B2B software companies is much lower. The chasm is still there, but it is nowhere near as daunting as it was a decade or more ago.

4.        Business Models. The new infrastructure has shifted the balance of power in tech from the product model to the as-a-service model. This has ushered in an era ofConsumption Economics (see Todd Hewlin and J.B. Woods’s book of the same name) which also works to modulate the commitment and thus the risk of embracing a new technology.

5.        Distribution. In a product economy, getting into distribution, and recruiting distribution partners who could provide the right level of service to your target customers, significantly amplified chasm dynamics. In an as-a-service economy, with the Web providing a ubiquitous distribution channel, there are still plenty of challenges around getting above the noise, but it is no longer anywhere near as hard to get into distribution.

6.        Marketing. Social networking and digital media have fundamentally changed the game. In the short term, this is actually creating some “chasm turbulence” as marketers and the marketing industry seeks to reorient themselves to the new realities. But for entrepreneurs who feel at home in the new world, it is dramatically empowering—again, a chasm dynamic reducer.

7.        New winners! Of course, that is why I had to revise the book. A new generation wants and needs to reference the companies it grew up with, not ones from a prior era. History is great, but only provided it sustains the narrative up to the present.

Overall, the key takeaways are two. First, crossing the chasm is a B2B model. B2C requires its own treatment, hence the four gears. B2B2C combines the two—and we are seeing a lot of that these days, especially when B2C companies seek to monetize their user traction.

And second, chasm dynamics, at least in the developed economies, have been muted by virtue of layer after layer of deployed technology that mitigates the risk and modulates the commitments a new user must undertake to trial the next disruptive innovation. In effect, disruptive innovation, the engine that drives the Technology Adoption Life Cycle, is becoming less disruptive.

What’s not new?

1.   The Technology Adoption Life Cycle. Communities of all sizes in all geographies in all industries, indeed in all contexts, still self-segregate into five adoption strategies when confronted by a disruptive innovation. And those five strategies are still:

• the Technology Enthusiast (who loves the innovation for what it is in itself), 
• The Visionary (who loves it for how it can deliver dramatic competitive advantage to a first mover), 
• The Pragmatist (who has approach/avoidance conflict, wanting the benefits, leery of the risks), 
• The Conservative (who is suspicious of the benefits and certain of the risks), and 
• The Skeptic (who believes the disruptive innovation is most likely an instrument of the Devil).

2.    The Whole Product. The whole product is the complete set of products and services needed to fulfill the customer’s reason to buy. How they respond to this issue is what separates each of the five strategies. Technology enthusiasts are content to just play with the product itself. Visionaries will fund projects to build out a whole product before anyone else is ready to. Pragmatists need to see a whole product in production before they are comfortable to jump in, and they will check references assiduously to see if it is really there. Conservatives need a bulletproof whole product, and even then they are sure they are going to break something. Skeptics think the whole product will never come into existence

3.    Business Ecosystems. If anything, these are more pronounced in the present era, where global outsourcing requires vendors to orchestrate a supply chain and a delivery and support chain end to end. Even when the customer or consumer perceives little to no risk, the business partner does, if for no other reason than the opportunity cost of committing to an innovation that never gets to critical mass. In other words, there is the challenge of customer adoption, and the parallel challenge of ecosystem enlistment, and until both chasms are crossed, you do not have a going concern. 

4.    Word-of-Mouth References. Pragmatists are the ones who make or break any market development strategy, if for no other reason than they move as a herd and thereby create bloc voting effects. And pragmatists make their buying decisions based on what they see other pragmatists just like them doing. So word-of-mouth has always been the number one influence on making risk-bearing purchase decisions, and always will be.

5.    The Chasm. Pragmatists will forever hold back until they see others like them jump in, and visionaries will always go ahead of the herd in search of first-mover advantage, and this will always create chasms. (It is good to be in a business that promises lifetime employment.)

6.    Pragmatists in Pain. In order to get the pragmatist community activated, a subset of pragmatists have to go ahead of the herd. These will be pragmatists in pain. They will be saddled with an ever-worsening problem that cannot be solved by their established systems. In short, under current course and speed, they are toast. Once they become aware they have nothing to lose, they become candidates for adopting the new technology—but only if it comes in the context of a complete solution to their increasingly pressing problem.

7.    Beachhead Strategy. To serve pragmatists in pain, you need to pre-wrap a complete solution, including the efforts of partners and allies. This can only happen with a great degree of focus, and even then it requires a market-making narrative that is compelling enough to win over the other participants in your solution. This is an uncommon situation and is normally specific to a particular type of process in a particular industry. Focusing intensely on that process and that industry is still the fastest, surest, safest way to cross the chasm.

Seven Gifts from people with the happiest lives

[Editor's note: As we enter the new year, I thought this list that was compiled  from interviews of people across all ages, ethnic groups, and circumstances was especially thought-provoking. While it is a departure from our normal content for these eLetters, I hope you find it inspiring as we enter this new year. This came from Hugh Hewitt's Book, "The Happiest Life."  I was so compelled, I framed it to hang in my office.      - DPM]

Traits for Happiness

Seven Gifts from people with the happiest lives

Encouragement

Enthusiasm

Empathy

Energy

Good Humor

Graciousness

Gratitude

Our best wishes for a happy, healthy, and prosperous new year! 

Please add your comments.

Four Possible Scenarios of the future: How would your company respond?¹

[Editor's Note: When we initially published this article in 2008, most business leaders were still expecting a "normal" recession and recovery cycle. We now know that we have seen a combination of uncertainty and slow growth. While many companies have reacted relatively passively, some are changing the dynamics. I hope you find this useful. - DPM]

 

Four Possible Scenarios of the future: 

How would your company respond?¹

 

1. Paralysis/Survival: This describes a situation where external events will be unknown and surprising, and companies will respond to them in a predominantly passive and reactive manner.

 

This, clearly, is the worst-case scenario. In this situation, "unexpected and disruptive events will increase over the next three years, and companies (and/or economies) will react by pulling into a protective shell." The external shocks could include economic developments such as the nationalization of major global industries (like oil, banking, auto) and significant disruptions to global material flows. On the political front, terrorist attacks could escalate in different parts of the world, and the U.S. led anti-terrorism coalition could fall apart. Isolationism and protectionism may be revived. Companies (could) react by trying to protect existing assets with layoffs, reduced R&D investment, reduced product development, and lower foreign direct investment. Consumers may compound the problem by reducing spending dramatically.

 

  The bottom line in this scenario: A long, global recession

 

2. Slow Growth:This scenario predicts a future where external events will be known and expected, but companies will respond passively to them.

 

This, too, is a grim scenario, though not as irredeemably dismal as the previous one. In this case, "disruptive events with moderate impact continue, and while seen as normal, they result in an economic malaise." This scenario would be marked by debt and currency problems in key world economies, though a full-blown long-term global recession is avoided. Unemployment would be higher but manageable, but consumer confidence would be low. Politically, the war against terrorism could head toward a stalemate situation. Companies would get used to the risks of terrorism and learn to cope with their losses. They would make modest investments.

 

The bottom line in this scenario: Life becomes an overpowering shade of gray

 

3. Thriving With Chaos: Here, external events will be unknown and surprising, but companies will respond mostly in an active and opportunistic fashion.

 

In this scenario life is still gray, but sunlight begins to filter through the gloom in some areas. "Unpredictable disruptive external events" would continue, but "corporate and national resolve to be successful in the face of adversity" would drive modest prosperity. While uncertainty would continue, it would be considered a cost of doing business. Companies would try to seize business opportunities amid the disruption and uncertainties, and make increasing investments in areas that seem to be potentially profitable. In the political arena, the continued global realignment of the U.S. with Russia and China would continue to open up new market opportunities, but the Islamic and developing nations would be shut out of these new alliances. The war against terrorism would continue without a clear victory.

 

The bottom line: Life could be better, but there's money to be made if you know where to look.

 

4. Global Growth: In this scenario, external events will be known and expected, and companies will respond actively and aggressively.

 

This, clearly, is the best-case scenario, one in which "countries and peoples of the world recognize common goals and focus on economic development and peace as the route to permanent stability." The key features of this scenario would be that the recession proves short-lived and the business cycle would return to normal; the global coalition against terrorism would evolve into a coalition for peace and commerce, and the threat of terrorism would fade. Investments in new technologies for energy management would reduce the role of oil in Middle Eastern politics. Consumers would feel confident about the future, increase their spending, and lay the foundations of a sustained economic recovery. Trade barriers would be lowered and the developing economies would grow in tandem with the developed ones.

 

If these four scenarios - or a combination of them - represent what lies ahead in the next three years, what strategies should companies put in place today to deal with them?  Clearly, though, neither these scenarios nor the strategies that follow from them will apply across the board. The scenarios will play out differently not only in different industries, but also in various regions of the world. Accordingly, the strategies that companies develop to cope with these situations will need to vary to reflect these differences.

 

It would be a mistake to allow the uncertainties that prevail today to put business decision making on hold. The future may be unclear, but one thing is certain: In today's circumstances, scenario planning is more than a tool. It is a weapon to combat uncertainty, and the future will belong to companies and executives that wield it well.   

      

How well is your company prepared to respond? Are you taking control of the things that you can? Are your actions strengthening your company  - or weakening it? Are you building flexibility into your plans? Have you changed your approach to planning?

The Mead Consulting Group helps dozens of companies and organizations - like yours - every year with scenario planning. The process has helped our clients consistently outperform  their competition.

 Please comment

HOW DO YOU HUNT FOR PROFITS? BY LOOKING IN YOUR OWN BACKYARD

[Editor's Note: Recently I have had a number of conversations with business owners and CEOs about sustaining profitability. I thought I would reach into the "article archives." While we first published this in 2003, it is still relevant ten years later in 2013.  - DPM]

HOW DO YOU HUNT FOR PROFITS? BY LOOKING IN YOUR OWN BACKYARD

Tier your customers by profitability by creating a profit map.  A profit map is a clustering of customers, products, services, and transactions by profitability, and an analysis of the key profit drivers. This forms the basis for rapidly improving a company's profitability through careful management of the details of the business without the need for major capital expenditures.

Let's look at the profit mapping process, using the example of a distribution company. The process has five steps.

Decide to analyze profitability at a "70 percent accuracy" level. Some companies spend a huge amount of time and money setting up an activity-based costing system that is much too detailed. All too often, the measurement becomes the project, and after endless debates, many projects lose momentum before they are translated into actions that hit the bottom line.

The most important results usually will be very clear from rapid, intelligent analysis using best knowledge and rules of thumb. Once a profitability picture emerges, it makes sense to improve the accuracy only where better information will change an important action. In most companies, after the analysis is over, the managers institute only a few high-leverage initiatives.

Construct a profitability database for the company. Select a time period, often two to six months, that is representative, and load the full set, or an excerpted set, of transactions (i.e. order lines) onto a computer. Each transaction should carry crucial information including the identity of the customer and product, as well as special services. Next, develop cost functions and use these to net the transaction's gross margin (GM) 

In developing cost functions, it is generally best to allocate costs using an easy-to-measure variable. For example, allocating operations costs by transaction or order line usually works well, as each line entails order-taking and picking. Inventory carrying costs can be handled by rules of thumb, such as holding "A" items for two weeks, "B" items for four weeks, and "C" items for eight weeks. Transportation costs can be allocated through simple decision rules based on customer location (region, near to or far from a distribution center). Where a sales call is needed to take an order, that portion of the selling expense can be allocated by orders. Other costs can be similarly allocated with reasonableaccuracy.

It's important to allocate all costs, including general overhead, for two reasons: (1) this enforces the discipline of viewing the whole cost of the business whendetermining whether to keep or change a major component; and (2) this ties the analysis directly to the company's financial statements, ensuring credibility and accurate projections.
  
This process will yield a database of transactions, each with revenues, GP, and NP. The database can be analyzed to display account, product, and transaction profitability. It will show you where the big pools of profits and losses are. The database also can be used to project the impact of changing the account and product mix, as well as changing the cost of key elements of operations and sales. The former shows the effect of focusing the company on high-profit market segments, while the latter shows the effect of altering the business model to change "bad" customers into "good" customers.

Model a customer - Determine the characteristics of the Chosen Customer. Choose a few customers and products that are reasonably representative, and look carefully at their economics. Try choosing a large and small customer each from a few key market segments, and a fast-moving and slow-moving product from each of a few key product families. Ideally, you will have about six to twelve representative situations to examine closely.

For each customer, look methodically at the profit drivers-revenues, margins, and costs-for different products. Try different business model configurations such as changing the order interval, sales interval, or service interval. Look at the pricing, both price levels and price mechanisms. Altering the product mix and developing substitution programs also can provide valuable levers for profit improvement.

Here, you are looking for "profit levers". Once you have found effective profit levers, check several other similar customers to be sure you can generalize your findings.

Modeling the effects of key profit levers on representative customers works well for three reasons: (1) it will be intuitively clear which elements of the business model (e.g. order pattern) can be changed and what the effect will be; (2) you can actually call the customers to see what their reaction to the potential changes would be; and (3) it will be easier to explain the changes using concrete examples when you "sell" the initiative to your colleagues.

Project to the whole business. Divide the entire business into clusters, or market segments, that are similar to the customers and products you've modeled. See where the big pools of profits and losses are now, and what the profit impact would be of making the changes. This will tell you what's most important to do.

With this picture of current profits and profit improvement potential, you can identify the few high-payoff actions that your company can take relatively quickly. First and foremost, act forcefully to secure the high-profit segment of your business. Only then institute a process to improve the profitability of the marginal part of the business. This process probably will include training front-line sales and operations associates in day-to-day coordination to improve profitability to its highest potential.

What about the unprofitable customers? Here's what the CEO of a major service company said about exiting unprofitable business segments or customers:
  

"Before exiting, give them a chance to pay higher prices or modify the profit levers. We did exactly that. We knew our profitability was eroding. Through analysis, we found a business segment where we were losing money. Profit analysis allowed us to determine what changes would be required to generate acceptable returns. The underlying issue was not pricing-it was order pattern, order size, and delivery requirements. Before exiting the segment, we told our customers what we needed in order to continue servicing them. To our pleasure, they agreed to make the changes, and we saw a quantum improvement in profitability in six months!"

 

Finally, phase out the parts of the business that cannot be made profitable. This will be counter-intuitive and some in the company will resist, but keep your eye on the huge upside to refocusing 20-40 percent of your sales force and operations assets away from tending unprofitable business and toward aggressively growing your share of the highest-profit end of the business.

 

Institutionalize profit mapping.Reflect on the value produced by determining the tiers of customer profitability ("profit mapping") and decide to institutionalize the process. Repeat the analysis every three to six months.Once you have set up the analysis, subsequent rounds will go very quickly. The process itself will build teamwork and it will become a new way of looking at the business. In parallel, build profit mapping into the new account qualification process. As your profitability improves, new opportunities will constantly be created. The better you get, the better you can get.

 

From financial information to action

A service company CEO mentioned above reflected on his experience with profit mapping, "Financial systems often do not have the information that you need. If they did, the problems would have been solved long ago. To be truly effective, you need to create a cross-functional team that understands how the business operates. This will allow the conversion of financial information into management information which, through analysis, will lead to action."

 

By the way, how do you hunt for profits? By looking in your own backyard-again and again and again! In work with Mead Consulting clients, our clients use proven methods designed to center their business around delivering continuous value to the best customers. Revenue and profit growth can be realized in the first 90 days of implementation.

¹Excerpted from an article by Jonathan Byrnes, The Bottom Line: The Hunt for Profits, HBSWK Pub Date: Nov.11, 2002

Please comment 

Policy Uncertainty Paralyzes the Economy

[Editor’s Note: This article in the Wall Street Journal on September 25, 2013 provides interesting insight that perhaps ending the “fight” between the President and both houses of Congress is more important to adding jobs than who is right]

Policy Uncertainty Paralyzes the Economy

Getting back to the 2006 level of uncertainty would add 2.3 million jobs.

By WILLIAM A. GALSTON

Endless strife over public policy increases uncertainty, and greater uncertainty slows growth. Beyond all the damage that political hyperpolarization inflicts on public trust, it undermines what the American people want most—jobs for themselves and expanded opportunity for their children.

A growing body of economic research supports this linkage between policy-based uncertainty and the real economy.

Over the past few years, Stanford-based economists Scott Baker and Nicholas Bloom teamed up with the University of Chicago's Steven Davis to develop a measure of economic policy uncertainty and to explore the effects of changing levels of uncertainty on the economy. Between 1985 and 2007, they found, uncertainty varied within a narrow and mostly predictable range, moving up in response to presidential elections and international conflicts and then subsiding. Since then, however, policy uncertainty has risen to historically elevated levels, with the peaks—corresponding to events such as the collapse of Lehman Brothers and the initial defeat of the TARP legislation—surging above that after the 9/11 terror attacks.

In a finding that today's policy makers would do well to ponder, the highest level of policy uncertainty ever recorded—in mid-2011 as Washington struggled with the debt ceiling and narrowly averted default—stood at two-and-a-half times the average of the past quarter century. Since 2007, policy-induced uncertainty has become a larger and larger share of overall economic uncertainty.

 Policy uncertainty directly affects economic activity. Messrs. Baker, Bloom and Scott summarize their case: "When  businesses are uncertain about taxes, health-care costs, and regulatory initiatives, they adopt a cautious stance.      Because it is costly to make a hiring or investment mistake, many businesses naturally wait for calmer times to expand.  If too many businesses wait to expand, the recovery never takes off." The evidence also suggests that policy uncertainty   increasing affects the performance of the stock market.

This story makes intuitive sense. But how much of a difference does uncertainty make in the real economy? To answer this question, Messrs. Baker, Bloom and Scott make use of a statistical technique for which Christopher Sims won a 2011 Nobel Prize in economics. They find that restoring 2006 levels of policy uncertainty could increase industrial production by 4% and employment by 2.3 million jobs over current baseline estimates—enough to bring unemployment down by about 1.5 percentage points.

It's easy to dismiss a single innovative study: Every index is controversial, as is every model and statistical technique. But in July 2013, Sylvain Leduc and Zheng Liu, two researchers at the Federal Reserve Bank of San Francisco, published a paper that took a different route to a very similar result. Their point of departure was a historical relationship known as the Beveridge curve: As job openings increase, the unemployment rate tends to fall. The Great Recession has disrupted the terms of this relationship, however. The unemployment rate has fallen much less than the rise in job openings suggests that it should have, and there are more jobless workers per job opening than in previous recoveries.

The San Francisco Fed researchers find that heightened policy uncertainty has become increasingly important in the job market. It turns out that as uncertainty rises, the intensity of businesses' recruitment activities wanes, lowering the rate at which firms fill jobs. By the end of 2012, the researchers calculate, heightened policy uncertainty accounted for about two-thirds of the shift in the Beveridge curve. Their bottom line: "[I]f there had been no policy uncertainty shocks, the unemployment rate would have been close to 6.5% instead of the reported 7.8%"—a result that aligns remarkably well with the Stanford/Chicago team's conclusion.

In testimony before the Senate Budget Committee on Tuesday, an intellectually and politically diverse panel—Allan Meltzer (Carnegie Mellon), Chad Stone (Center on Budget and Policy Priorities) and Mark Zandi (Moody's Analytics)—agreed that policy uncertainty is a drag on the economy. Mr. Zandi's model suggests if political uncertainty had remained at pre-recession levels, output would be $150 billion higher and unemployment would be 0.7% lower than they are today—smaller effects than the other studies indicate, but still very significant.

If this emerging body of research is correct—and it is more than plausible—then elected officials should ask themselves some hard questions. Both parties are sure they are right about what's needed for economic growth. But when our governing institutions are closely as well as deeply divided, as they are today, neither side can get its way. Each party faces the same choice: It can fight on in the hope that a governing majority of the people will come to see things its way, or it can compromise with the other party to bring the fight to a close.

So far, both parties have chosen to fight, believing that their preferred prescriptions for the economy would yield much better results than could any feasible compromise. But the fight itself is taking a toll on the economy and is making life worse for millions of Americans. Maybe that's why the people are pleading with their elected officials to compromise. It's time for Washington to start paying attention.

A version of this article appeared September 25, 2013, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: Policy Uncertainty Paralyzes the Economy.

 What do you think?